Video: Microsoft tries to reinvent ads, Yahoo or not

Microsoft is offering billions to tap into Yahoo’s advertising expertise, but the company has also been attempting to catch up through projects of its own. Members of the company’s adCenter Labs group demonstrated some of the latest at an event in Redmond today.

One of them: A “dynamic product placement” prototype that would help advertisers insert and change product images in a video after it was shot. Click on the video below to see Philip Lee, an adCenter Labs research analyst, demonstrating the technology during the event.

The annual adCenter Labs “Demo Fest” was scheduled prior to Microsoft announcing its unsolicited bid for Yahoo last week. The executives in attendance declined my attempts to get them to talk about how they would see Yahoo’s technology meshing with what Microsoft is working on. Alex Gounares, corporate vice president of Microsoft adCenter and Commerce Platforms, alluded to the Yahoo bid only briefly in his comments.

“This is a space we’re obviously very enthused about, investing quite heavily. Maybe you saw some news on this on Friday, to highlight the point,” Gounares said.

Microsoft has been trying to gain traction in the digital advertising market now for several years. Despite all the time and money spent, the company still has a long way to go to catch up. Google dominates the market, with $16.4 billion in annual advertising revenue, compared with $6 billion for Yahoo and less than $2 billion for Microsoft.

The company spent $6 billion to acquire Seattle-based digital advertising company aQuantive, and it’s offering more than $44 billion to acquire Yahoo, in part to combine their efforts in advertising. That reflects on the company’s internal efforts, said Matt Rosoff, an analyst at research firm Directions on Microsoft, who attended today’s event.

“Obviously if Microsoft as a whole were satisfied with this group’s progress, they wouldn’t see the need to spend $50 billion on acquisitions to improve their position in online advertising,” Rosoff said.

At the same time, he added, some of the video-related ad projects shown at the event were interesting. One analyzes video to determine where and when to place a small ad on the screen. Another uses speech-recognition technology to determine what’s being discussed in a video, then deliver related content and ads on the PC screen.

Here’s another, dubbed Air Wave, a prototype out-of-home advertising system that applies concepts from Microsoft’s Surface tabletop computer. Speaking on the video is Li Li, a group manager in adCenter Labs. Demonstrating the technology is Junxian Wang, a software developer and computer vision researcher in the adCenter Labs group.

Video-related advertising is one of the areas where Microsoft says it sees the potential for big growth. Two others are video-game advertising and ads on mobile devices. In contrast, Google gets most of its revenue currently from text-based ads on Web sites and next to search results.

“If you think about digital advertising, it’s a very, very nascent business,” said Gounares, a former technology assistant to Microsoft Chairman Bill Gates, in his comments at the event. Gounares explained that the company is trying to come up with advertising technologies that will turn into big products and businesses in future years.

He added, “Some of the stuff you’re going to see today, we’re enthused about it, maybe it’s a great idea, maybe it’s a bad idea, maybe it will end up in a product for market, maybe it will evolve a little bit before it turns into products. We don’t know, but that’s kind of the point. We want to go out and try new things and see how they work, and get feedback and iterate on them. That’s really how we’re going to push the state of the art forward.”